Newsvendor Models

The newsvendor model has a rich and expansive history in operations research and management science. In its essential formulation, the newsvendor model characterizes the following optimization problem: a firm facing random demand for a product that becomes obsolete at the end of a single period must decide how many units of the product to stock in order to maximize expected profit for the period. The celebrated solution to this problem prescribes a supply quantity that equates the expected cost of overstocking to the expected (opportunity) cost of understocking. This classic model, with its intuitively appealing optimal solution, serves as the launch pad for such vast and important literature as stochastic inventory theory, supply chain coordination, and the operations/marketing interface.